The markets close on Friday and the futures on Sunday night are giving us no clues about direction.
Futures are flat at 11:PM and there is no concrete news out of Greece. The Finance Minister said Greece will reveal a plan this week to cut waste in public spending and renew faith in the government. The minister said they plan to cut 1 billion in spending in 2010. Since they are $294 billion in debt and have a $24 billion deficit budget in 2010 it sounds like that spending cut needs to be 10 billion not 1 billion. Both major labor unions have scheduled strikes with hundreds of thousands of workers participating. This will not translate well in the global markets.
I still believe the path of least resistance is down and the rally on Friday was a short squeeze on the IMF bailout rumor. However, I am not confident enough to add a couple more plays. Our current portfolio is bearish so a continuation of the trend would be ideal.
We were stopped out of MMS on Friday about 5 min after the position was entered. Despite the +$4 spike on Thursday it appears there was still some shorts that needed to cover. The entry/stop were so close it only cost us a dime.
No new plays today.
No New Plays Today
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We do not sell out of the money puts for a few cents and then hope the market does not correct and cost us a fortune to exit. I don't like to risk a dollar to make a quarter.
The concept for Option Writer is to find solid momentum plays with enough volatility to inflate the option premiums. We will sell in the money naked puts ahead of the stock price and let the stock rally to our strike.
Selling in the money puts allows us to capture nearly dollar for dollar the movement in the stock price.
Because we are selling in the money that same dollar for dollar move can go against us as well. For this reason we establish tight stops to take us out of the play for a loss of a few cents rather than let the losers grow and "hope" they rally again. In a typical month we could get stopped out of twice as many plays as we close for a profit but those stops will be minimal and the winners worth the trouble.
If you do not have the ability to sell options you can turn the plays into spreads by buying a lower strike put. This will decrease your margin requirements but it will also decrease your profits.
There are several different formulas for determining margin requirements for naked put writing. These are normally broker specific and some can require larger margin requirements than others.
Here is the most common margin calculation for naked puts.
100% of the option premium + ((20% of the Underlying Market Value) - (OTM Value))
For simplicity of calculation simply use 20% of the underlying stock price and you will always be safe. ($25 stock * 20% = $5 margin)